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Programme: BTEC Higher National Diploma (HND) in Business Unit No and Title: Unit 9, Management Accounting: Costing and Budgeting Unite Level: H1 Assignment Ref, No:1.1.1- Management Accounting: Costing and
Module Tutor: Sabir Hussain Jafri Submitted By: Md Sultan Mahmud Student ID: 11127 Date: 16th May 2010
Synopsis. . . . . . . . . . . . . . . . . . . . . . . . .. . .
Literature review: a. Identify and classify different types of cost: . . . . . . . . . . . . . . . . . . . . . . . . . . . ….4 b. Explain the need for, and operation of, different costing methods: . . . . . . . . . …4-5 c. Calculate cost of good sold and ending inventory using the data in annexure 1 through FIFO, LIFO and AVCO techniques. . . . . . . . ……………….5-7 d. Explain Collection, analysis and presentation of data using appropriate ……. ..7-9 e. Explain how to Prepare and analyse routine cost reports: . . . . . . . . . . . …………9-10 f. Explain how to evaluate indicators of productivity, efficiency and effectiveness: . 10-11 g. Explain the principles of quality and value, and identify potential improvements: . . 11-13 h. Explain the purpose and the nature of the budgeting process: . . . . . . . . . . . . . . . . . . 13-14 i. Select appropriate budgeting methods for the organization and its needs: . . . ……14-15 j. prepare budgets according the chosen budgeting method using data in annexure 2. . . . . . . . . . . . . …………………………………………………15-17 k. Prepare a cash budget using data in annexure 3. . . . . . . . . . . . . .. . …………………17-18 l. Calculate variances, identify possible causes and recommend corrective actions using the data in annexure 4. . . . . . . . . . . . . . . . ……………………………..18-22 m. Prepare and operating statement reconciling budgeted and actual results using the data in annexure 4. . . . . . . . . . . . . . . . . . . ……………………..22-23 n. Report findings to management in accordance with identified responsibilities centres.23 Conclusion and recommendation: Reference: ……………………………………………………………………………………24
cleanliness and value. service. Bigmac. Cheese Burger. to increase market share. Japan. McDonald’s vision is “to be world best quick service restaurant. Germany. in California. History: McDonald’s founded in 1940 by Dick and Mac McDonalds in San Bernardino. Egg McMuffin etc. and customer satisfaction has produced high returns of share holders. profitability. It also the leading chain of hamburger fast food restaurant.000 local restaurant serving more than 80 million people in 118 countries each day. UK and USA. so that the McDonald’s make every customer in every restaurant smile”. Some of those operate by the company. service and cleanliness. some of those franchisees or by affiliates operating under joint venture agreements. Some of its world famous foods are Fries. I’m lovin’ it is the main slogan of McDonald’s. Brazil. Besides it has nine major markets in Australia. McDonald's serves over 2 million customers by delivering only the highest levels of quality. It has literally changed the American’s eating habits and increasingly the habits of non-Americans. France. Canada. McDonald’s has more than 31’000 restaurant in 118 countries. Based on their introduction “ speedee service system” they established the principles of modern fast food restaurant in 1948. China. 3 . Every year they are adding many numbers of restaurants in many countries all over the world. Being the best means providing outstanding quality. Hambuger. McDonald’s brand mission is to “be our customer’s favourite place and way to eat”. every day in the UK. Quarter pounder. Business Growth & Geographical Location: McDonald’s is spreading its business globally.The Success of McDonald’s Synopsis: Type of business: : McDonald's is one the best known brand and leading global food service retailer with more than 31. Chicken Nugget. McDonalds opened its first Restaurant in UK on October in1974 and by December 2004there was over 1330McDonalds operating in UK.
D/variable cost: cost that varies with the changes in the level of activity. unit or customer . unsold inventory. direct materials. H/product cost/inventory cost: cost associated with producing the product that is capitalized in the inventory. different costing methods: Different industries follow different methods for ascertaining cost of their products. M/life cycle cost: cost associated with the various stages of a product’s life cycle.g. G/unexpired cost: a cost associated with the object whose benefits have not been obtained or recorded. E/fixed cost: The cost that doesn’t changes and vary with the change in the level of activity. C/capacity related cost: costs that are based on the amount acquired than the amount used. I/period cost: cost incurred in the current period of production. E.g. cost of one passenger on airline.g. E. and operation of.g.e.[p1] b. straight line depreciation. fuel used in the production line machine the cost for fuel on each unit is not known. cost of goods sold. E. direct materials. opportunity costs. E.e. The method to be adopted by business organization will depend on the nature of the production and the type of out put. e.g. an expense i. g research and development cost for a particular product at a particular time. e. E.g.g.g. L/relevant cost: difference b/w costs when 2 or more products are involved. distribution etc. F/expired cost: a cost associated with the object whose benefits have been obtained or recorded.g. Explain the need for. labour and money for the goods and services to be sold and to earn profit on the services and goods for resale. g depreciation of assets. J/incremental cost: cost of one or more item. cost if one product is dropped. development and design. production. 4 . Cost can be classified in different ways. E.g. can be direct or indirect but in short run these cost are fixed. E. Different types of cost are discussing below: Types of cost: A/direct cost: any cost which is directly related to the production of the goods and services delivered. Identify and classify different types of cost: Cost is the spent/sacrifice of time. The following are the important methods of costing. B/indirect cost: cost that is common or shared by more than one cost object.Literature review: a.g. E. e. direct labour. labour in the production team etc. K/implicit costs: instated and unrecorded costs.
This method is applied in industries like mines or drilling. Under this system cost sheet is prepared to find out cost per unit and profits or loss on production. Under batch costing a batch of similar products is treated as a separate unit for the purpose of ascertaining cost. The main feature of process costing is that output of one process becomes the raw materials of another process until final product is obtained. Costs are determined separately for each process. cement works etc. Calculate cost using appropriate techniques: FIFO Method: Date Feb. Batch Costing: A batch is a group of identical products. Service (Operating) Costing: This method is used in those industries which rendered services instead of producing goods. It is also called service costing. electricity department etc. The organization like water supply department. such as printer general engineering work shop etc. Process Costing: This method is used in industries where production is carried on through different stages or processes before becoming a finished product. The total cost of a batch is divided by the total number of units in a batch to arrive at the costs per unit. Where a product comprises many assembled parts or components (as in case of motor car) costs have to be ascertained for each component as well as for the finished product for different components. Under this method cost of providing a service is also determined. Multiple Costing: It means combination of two or more of the above methods of costing.• • • • • • • Job Costing: Job costing is concerned with the finding of the cost of each job or work order. [p2] c. each contract or job is treated as separate cost unit for the cost ascertainment and control. This type of costing is generally used in industries like textile. under this system a job cost sheet is required to be prepared find out profit or losses for each job or work order. different methods of costing may be used. 1 Feb. oil refining etc. This method is followed by these concerns when work is carried on by the customer’s request. Operation Costing: This is suitable for industries where production is continuous and units are exactly identical to each other. This type of costing is generally used in industries like bakery. 4 200 7 1400 Units Purchase Rate Amount $ $ Units COGS Rate Amount $ $ Units 800 800 200 Balance Rate Amount $ $ 6 4800 6 7 4800 1400 5 . are the examples of using operating costing. toy manufacturing etc. Contract Costing: Contract costing is applied for contract work like construction of dam building civil engineering contract etc. chemical paper.
4 Feb. 11 Feb. 10 200 8 1600 800 200 200 800 6 4800 200 200 200 200 400 200 200 100 (100) 7 8 8 8 1400 1600 800 (800) 6 7 8 7 8 7 8 8 4800 1400 1600 1400 1600 1400 1600 3200 Feb. 25 Feb. 12 Feb. 11 400 400 400 300 400 6 6 8 6 6 2400 2400 3200 1800 2400 6 Feb. 25 . 28 600 1400 9 5400 11600 1200 7800 So. Costs of goods sold (COGS) =$ 7800 Ending Inventory=$ 8600 (1000 Units) LIFO Method: Date Feb. 20 Feb. 20 300 400 400 600 1000 8 8 8 9 2400 3200 3200 5400 8600 Feb. 1 Feb.Feb. 10 200 200 7 8 1400 1600 Units Purchase Rate Amount $ $ Units COGS Rate Amount $ $ Units 800 800 200 800 200 200 200 200 400 400 8 3200 400 100 (100) 8 6 6 3200 600 (600) 8 7 6 1600 1400 2400 Balance Rate Amount $ $ 6 4800 6 7 6 7 8 4800 1400 4800 1400 1600 Feb. 12 400 8 3200 Feb.
analyse and present data using appropriate techniques: Methods of Data Collection There are four main methods of data collection.2 6. 11 Feb.5 6.25 8.25 3625 (725) 200 200 7 8 1400 1600 800 6.5 5200 Units Purchase Rate Amount $ $ Units COGS Rate Amount $ $ Units 800 1000 1200 400 800 300 400 1000 1000 Balance Rate Amount $ $ 6 4800 6.25 7. 20 Feb. Collect. 10 Feb. because of the cost and/or time required. 25 Feb.Feb. In most studies. 1 Feb. Costs of goods sold (COGS) =$ 8600 Ending Inventory=$ 7800 (1000 Units) AVCO Method: Date Feb. • Census. a census is not practical. Costs of goods sold (COGS) =$ 8100 Ending Inventory=$ 8300 (1000 Units) [p3] d. 28 600 1400 9 5400 11600 1200 8100 400 8 3200 500 (100) 7. 12 Feb. 7 . A census is a study that obtains data from every member of a population.25 7.5 7. 28 600 1400 9 5400 11600 1200 8600 400 600 1000 6 9 2400 5400 7800 So. 4 Feb.25 7.3 6200 7800 2600 5800 2175 2900 8300 8300 So.
A sample survey is a study that obtains data from a subset of a population. taken from patterns.Narrative analysis could involve study of literature or diaries or folklore. 6. After find boundaries. Ideally. 5. the researcher draws a conclusion about whether the treatment ( independent variable) had a causal effect on the dependent variable. However.Emphasis is on finding precise beginnings and endings of events by finding specific boundaries and things that mark boundaries or events. Taxonomy. as well as written descriptions. Use flow charts. Experiment. Assume meaning is not inherent in those. the researcher is not able to control (1) how subjects are assigned to groups and/or (2) which treatments each group receives. etc. etc. themes. Like experiments. or other kinds of groups of data. Presentation of Cost Data under Marginal Costing and Absorption Costing Marginal costing is not a method of costing but a technique of presentation of sales and cost data with a view to guide management in decision-making. Narrative Analysis. to pictorially represent these.• Sample survey. the researcher compares group scores on some dependent variable. 4. Methods of Data Analysis 1.An outline of generalized causation.Determine how the meanings of signs and symbols are constructed. The study is "controlled" in the sense that the researcher controls (1) how subjects are assigned to groups and (2) which treatments each group receives. 3. In the analysis phase. in order to estimate population attributes. logical reasoning process. often they aren't. 2.a classification system. observational studies attempt to understand cause-and-effect relationships. An experiment is a controlled study in which the researcher attempts to understand cause-and-effect relationships. Based on the analysis. 8 . find phases in event by repeated viewing. unlike experiments. Logical Analysis/Matrix Analysis. categories should be mutually exclusive and exhaustive if possible. meaning comes from relationships with other things. • • Observational study. Event Analysis/Microanalysis. diagrams. Semiotics. Typology . Higher levels are inclusive of lower levels.A sophisticated typology with multiple levels of concepts.
The traditional technique popularly known as total cost or absorption costing technique does not make any difference between variable and fixed cost in the calculation of profits. But marginal cost statement very clearly indicates this difference in arriving at the net operational results of a firm. Following presentation of two Performa shows the difference between the presentation of information according to absorption and marginal costing techniques: MARGINAL COSTING PRO-FORMA £ Sales Revenue Less Marginal Cost of Sales Opening Stock (Valued @ marginal cost) Add Production Cost (Valued @ marginal cost) Total Production Cost Less Closing Stock (Valued @ marginal cost) Marginal Cost of Production Add Selling. Admin & Distribution Cost Marginal Cost of Sales Contribution Less Fixed Cost Marginal Costing Profit ABSORPTION COSTING PRO-FORMA Sales Revenue Less Absorption Cost of Sales Opening Stock (Valued @ absorption cost) Add Production Cost (Valued @ absorption cost) Total Production Cost Less Closing Stock (Valued @ absorption cost) Absorption Cost of Production Add Selling. Admin & Distribution Cost Absorption Cost of Sales Un-Adjusted Profit Fixed Production O/H absorbed Fixed Production O/H incurred (Under)/Over Absorption Adjusted Profit £ xxxxx xxxx xxxx xxxx (xxx) xxxx xxxx (xxxx) xxxxx (xxxx) xxxxx £ £ xxxxx xxxx xxxx xxxx (xxx) xxxx xxxx (xxxx) xxxxx xxxx (xxxx) xxxxx xxxxx [p4] e. Prepare and analyse routine cost reports: 9 .
Routine costs report are prepared on the (expenses)costs incurred for the day to day operations of the business. Different researchers differ in how they prefer to keep track of incomings and out goings. If you have done this work well. Analysis of cost reports: By the time you get to the analysis of your cost reports. you can quickly and accurately focus on the pressing cost issues and catch potential problems early. efficiency and effectiveness: The words efficiency and effectiveness are often considered synonyms. operationalize and test your measures. Capital Productivity = (Output per capital employed = Output / Capital employed) It indicates that how much output get back by capital employing. develop and implement a sampling plan. the words efficiency and effectiveness take on very different meanings. usually measured or averaged out in terms of time spent working or labour time. These reports provide an up-to-date record of commitments and expenditure within budgets so that unexpected over/under run costs do not result. Machine Productivity = (Output per machine = Output / Machine hours for paid) It indicates that how much product we get back by the machine per hour. in more formal management discussions. conceptualize. and proficiency. you need to set up a procedure for logging the information and keeping track of it until you are ready to do a comprehensive cost analysis. Indicators of Productivity: 1. It's much more difficult to: define the research problem. By using these reports. ensuring that all transactions are properly recorded and authorised and. and develop a design structure. where appropriate. in order to run the business accordingly it is essential to prepare these reports and to analyse the overall performance of the business. f. In most cases. decisions are justified. 3. The Cost reports in Project are a powerful and very effective means of tracking the fiscal health of a project. along with terms like competency. Calculate and evaluate indicators of productivity. Indicators of Efficiency = (Actual standard hours / Actual hours worked X 100%) It indicates that how we can produce more standard goods at lower costs & time. In all but the simplest of studies. Analysing of cost reports helps in making future budgets and to cut the expenses with the performance appraisal. productivity. 2. these reports are made to check the over all performance of the business and helps in cutting the costs and doing the work efficiently and appropriately. Labour Productivity = (Output / No of employee) It indicates the quantity of goods and services that someone can produce with a given expenditure of effort. you will want to set up a database that enables you to assess at any time what is already in and what is still outstanding. Some process efficiency measures are: 10 . most of the really difficult work has been done. However. the analysis of the cost reports is usually a fairly straightforward affair. Indicators of Effectiveness = (Actual hour work / Standard hour work X 100) It indicates that how we can utilize our resources to produce goods.
how well the output of the sub process meets the requirements of the next phase in the process (internal customers). The eight principles are . percent on-time delivery. cost of poor quality per unit of output. queue time per unit. and how well the inputs from the external suppliers meet the requirements of the process. Explain the principles of quality and value. . or process step. labor) expended per unit of output. transaction. It is necessary to identify Quality Management as a distinct discipline of management and lay down universally understood and accepted rules for this discipline. The latest revision (version 2008) of ISO9000 standards are based on these principles. Involvement of People 4. System Approach to Management 11 . for leading and operating an organisation. 1. percent of time items were out of stock when needed.• • • • • • • cycle time per unit. and identify potential improvements: Quality management is becoming increasingly important to the leadership and management of all organisations. transaction. and inventory turns. Customer-Focused Organisation 2. [p6] • g. aimed at continually improving performance over the long term by focusing on customers while addressing the needs of all other stake holders". Process Approach 5. Link to Useful Quality Management Resources Definition of Quality Principle: "A quality management principle is a comprehensive and fundamental rule / belief. Leadership 3. Some effectiveness measures are: • • how well the output of the process meets the requirements of the end user or customer.. resources (dollars. or labor cost..
the resulting increment of product will decrease after a certain point. Principles of Value There are twelve principles of value used to determine highest and best use and to establish value (they will be covered in detail in Valuation Concepts): 1. and owner demographics. Variable Proportions: When the quantity of one productive service is increased in equal increments. resulting in continuous change in market value which must be anticipated. Factual Approach to Decision Making and 8. Continual Improvement 7. 4. while the quantities of other productive services remain fixed. 9. Competition: the tendency of a highly profitable use to be duplicated by others until an excess supply of similar goods and services reduces profitability. and management have been paid. 10. Contribution: the incremental amount of value contributed to the total value of a property by any given component. good or service that would be purchased at various prices during a specific period. 11. 8. 3. social. 2. as opposed to the actual cost of the component. 7. Potential improvements: the purpose of improvement is the implication of value on customers perception regarding the value of the product. Anticipation: the anticipated future benefits to be derived from the property.by improvements it become possible to derive an analytical model that recognizes the implication of company’s efforts to improve the the design 12 . and thus value. appearance. 6. Supply: the amount of a commodity. Mutually Beneficial Supplier Relationships. 12. 5. Surplus Productivity: the net real property income after the costs of labor.6. Balance: the equilibrium reached in a free market when complementary uses of neighboring property permit maximum value for individual properties and the neighborhood. Change: the continuing effects of economic. Substitution: the market value of a property is affected by the cost of obtaining an equally desirable and valuable property as a substitute. and personal property on the basis of a single class of usage at any given point in time. Demand: the amount of a commodity. and governmental forces on the property and its environment. improvements. Consistent Use: the requirement to value all aspects of a property: land. good or service that would be offered for sale at various prices during a specific period. Conformity: the creation of maximum market value through a reasonable degree of similarity of property use. capital.
Budgeting allows a company to have a certain degree of control over costs. rather than a participative one.quality conformance on product value as perceived by the customers. planning. There are several goals that many businesses seek to achieve (or should be trying to work toward) when they create and implement a budget. Budgets also allow a company to motivate its employees by involving them in the budget. the budgeting process may be completed by individual business units and compiled to form a master budget for the organization.quality should be improved as it costs as a performance indicator. Budgeting allows a business to take stock of revenue and expenses from the previous period. and is arguably its primary purpose. Transforming quality cost measurements into value provides a better explanation regarding the effect of prevention and appraisal activities on the quality improvement indicators. Budgets allow management to communicate goals and to promote goal congruence so resources can be coordinated and focused in key areas. In larger organizations. fair. It also allows the organization to add and remove products and services from its plan for the future period. Thus. This allows top management to get a picture of the entire business so they are able to better plan accordingly. may be dependent on meeting certain budgeting goals. Unfortunately this purpose of budgeting can cause employees to have negative feelings about the budgeting process because their compensation and. and judge where the business will be in future periods. and motivation. When an 13 . or lower return. which indicates whether the quality improvement efforts gave higher. Control and Evaluation Perhaps the most obvious of budgeting goals is that of control and evaluation. This is especially true in companies that focus on the evaluation purpose of budgeting and when the budgeting is a top-down process. participative budgeting can be motivating. Explain the purpose and the nature of the budgeting process: The Purpose of a Business Budget Business budgeting is a basic and essential process that allows businesses to attain many goals in one course of action. Planning Planning is another purpose of budgeting. These goals include control and evaluation. [p7] ( Author:JENS J DAHLGAARD) h. and even individual managers. communication. the value of quality improvements is a measure of return on quality improvements (ROQI). or assigning responsibility for these expenses. departments. A budget also gives a company a benchmark by which to evaluate business units. in certain cases. their jobs. such as not allowing many types of expenses to take place if they were not budgeted for. Communication and Motivation Other goals that an organization may use its budget to achieve that are less obvious include communication and motivation. While top-down budgeting does not accomplish this goal very effectively.
and the like are deployed appropriately. Line items in your operating budget may include: • Labor budget: The total labor cost to be expended for a set period of time calculated by taking every person in an organization. Although business budgeting is a procedure that most businesses go through. the manager talks with their administrative officers about budget requirements. · The managers can work with the Financial Services. Two of the most common budgets are • Cash budget: An estimate of a company's cash position for a particular period of time. department. The budgeting process can allow companies to communicate and achieve their goals. you can budget any activity in your organization that has a financial impact. material. · The completed budgets are presented by the managers to their · Executive · Officers for review and approval. In most cases. • Sales budget: An estimate of the quantity of goods and services that will be sold during a specific period of time. and allow them to monitor those achievements as well. it can be a greater tool than many people (and businesses) realize. Kinds of budgets When it comes right down to it. or project and multiplying the number of hours they are expected to work by their wage rates. usually for a period of one year or less. or work alone to prepare an estimate for the departments coming year. that person will be more likely to strive to achieve that budget. · The Financial Service Department prepares worksheets to assist the department head in preparation of department budget estimates · The Administrator calls a meeting of managers and they present and discuss plans for the following year’s projected level of activity. and other expenses required to produce them. equipment. then translates this information into estimates of the cost of labor. • Operating budget: A business's forecasted revenues along with forecasted expenses. department. you can be certain that resources such as money. • Production budget: A forecast thatstarts with the sales budget's estimates of the total number of units projected to be sold.employee is involved in creating his or her department’s budget. or business unit — will perform financially. If you can accurately predict your company's performance. Select appropriate budgeting methods for the organization and its needs: A budget is nothing more than a written estimate of how an organization — or a particular project. [p8] i. Justification of the budget request may be required in writing. The nature of a budget Budget process refers to the process by which governments create and approve a budget. Adjustments to the budget submission may be required as a result of this phase in the process. 14 . people. manufacturing plants. It is also an important step in overall business strategic planning.
and each approach can work well. By starting from scratch at each budget cycle. • Zero-based budgeting: Each manager prepares estimates of his or her proposed expenses for a specific period of time as though they were being performed for the first time. You can choose from three key approaches to developing a budget: • Top down: Budgets are prepared by top management and imposed on the lower layers of the organization. managers are required to take a close look at all their expenses and justify them to top management.00 Component unit cost Tota l 15 .000 Total 2 Production Budget units/hour s Sales units 10. • Bottom up: Supervisors and middle managers prepare the budgets and then forward them up the chain of command for review and approval.000. utilities. Each has its advantages and disadvantages. prepare budget according the chosen budgeting method: Grose Limited ANNEXURE 2 1 Sales Budget Units 10. office supplies. but can be unrealistic because they do not incorporate the input of the very people who implement them. These budgets tend to be more accurate and can have a positive impact on employee morale because employees assume an active role in providing financial input to the budgeting process. each activity starts from a budget base of zero.00 Sales budget 0 00 Selling price 1 1. [p9] (Author:GOLDBERG DROR) j. and many other common business expenses for a given period. In other words.• Expense budget: An estimate prepared for travel. • Capital budget: The total costs and maintenance fees planned for your company's fixed assets. The best kind of budget is the one that works. telephone. Top down budgets clearly express the performance goals and expectations of top management. although the pendulum is clearly swinging in favour of the bottom up approach. thereby minimizing waste.
0 2.00 0 7 112.000 16.00 Closing units 0 4.0 Units to be produced 00 XY Component WZ Production hours Finishing hours 5 3 4 2 1 1 5 7 5 2 2 0 1 4 3 Material usage Budget Component XY (number of stock to be produced * number of units of Component XY) 40.00 0 2 8.000 32.00 WZ 24.0 Units to be purchased ($) 00 00 00 13.00 0 16 .2 00 26.00 Closing units 0 16.00 8000 * 5 0 Component WZ (number of stock to be produced * number of units of Component WZ) 24.00 Less:Opening units 0 44.4 0 9.0 Units to be purchased 00 44.00 0 5 160.6 0 12.00 Material to be used units 0 20.00 8000 * 3 0 4 Material Purchase Budget XY 40.00 5 Direct Labour Budget Productio n Finishing Number of hours per unit Number of stock to be produced Hours required Rate per hour Total Labour Cost ($) 4 8.00 Less:Opening units 0 8.
95 0 ( 10 (1.5 15 50 1 0 1 1.50 4 1.50 1 4 Purchases made(assumed on credit) 1.4 2 Short term investments Opening Balance Closing Balance Cash inflow/(outflow) 60 60 40 ( 40) 10 40 30 [p11] l.50 Variances 0 1 5 Purchases Direct Material Variance 20 Cash paid to Other Creditors Opening Balance Other expenses Less:Closing Balance Direct material should be used (15*2*90) = 50 50 50 4 50 4 50 50 0 50 5 00 50 6 00 50 6 00 2. Calculate variances.20 Cost of sales Total Cost Closing Balance Less:Opening Balance 1.22 0 1 80 1.51 (6 [p10] k.80 0 1 20 1 00 1. Prepare a cash budget: Flossy Limited Cash Budget (6 20) 1 15 (5 30 50 3.8 00 0 12 50 1.00 0 35 00 2.90 Cash received from Debtors (w-1) Short term investments (w-2) Cash paid to Trade Creditors (w-3) Cash paid to Other Creditors (w-5) Dividend paid Tax paid Captial expenditure Sale of Plant and equipment Net cash inflow/(outflow) Opening Cash Closing Cash Workings 1 Cash received from Debtors 2 Opn debtors Sales Less:closing debtors 00 2. identify possible causes and recommend corrective action: Frost Production Company 3 Cash paid to Trade Creditors 1 Opening Balance Purchases (W-4) Less:Closing Balance 10 1.70 17 .85 0) (5 00) (4 70) 90 25 1 15 05) 30 Q3 1.5 0 1.45 (1.ANNEXURE 3 Q1 1.8 10 0 16 50 1.1 50 50 0 1.9 00 50 0 0 0 0 60 (1.9 50 3 1.2 30 0 1.00 0 3 00 1.15 0) (4 50) (2 00) (1 50) 10 15 25 00) 0) 0 40) Q2 2.83 0 1 18 60 1.
35 Direct material units should be used Material actually used Variance units = = 0 1.60 Direct Labor should be used (40*90) = Labour actually used Variance = 0 4.0 2.60 0 20 0 F = 0 1.00 0 (40 0) A = 0 60 0 F 3 Variable Production Overhead Variance 90 Variable overheads should be incurred (90*10)= Variable overheads actually incurred Variance 4 Fixed Production Overhead Variance 1.80 Fixed overheads should be incurred (90*20)= Fixed overheads actually incurred Variance = 0 1.40 0 (5 0) A 18 .10 Material actually used Variance 2 Direct Labor Variance 3.00 0 (10 0) A Variances of elements of cost 1 Material usage variance 1.
(10 Variance £ 2 Material rate variance 2.0 Budgeted rate Actual rate Variance £/unit Variance £ 0 1.5 0 70 0 F F 0) A 3 Labour efficiency variance 90 Labour hours should be used Labour actually used Variance hours Variance £ = = 0 80 0 10 0 40 0 Labour rate variance 4.5 0 0.0 0 (1.0 Budgeted rate Actual rate Variance £/unit Variance £ 0 5.0 0) (80 0) A A F F 4 5 Variable overhead efficiency variance 90 Overhead hours should be used Overhead hours actually used Variance hours Variance £ = = 0 80 0 10 0 10 F F 19 .
greater care taken in purchasing. change in material standard.2 5 (0.2 5) (20 0) A A 7 Fixed overhead efficiency variance 90 Overhead hours should be used Overhead hours actually used Variance hours Variance £ = = 0 80 0 10 0 20 0 F F 8 Fixed overhead rate variance 2. excessive waste.0 0 - Causes of variances: Material price • (F) – unforeseen discounts received. stricter quality control.0 Budgeted rate Actual rate Variance £/unit Variance £ **F=Favorable **A=Adverse 0 2. theft.0 Budgeted rate Actual rate Variance £/unit Variance £ 0 1. Material usage • (A) – defective material. 20 .0 6 Variable overhead rate variance 1.
Labour rate • (A) – wage rate increase Labour efficiency • (F) – output produced more quickly than expected because of work motivation. excessive use of services. change in type of services used. excessive waste. Prepare and operating statement reconciling budgeted and actual results: Frost Production Company Operating statement 21 . [p12] m. Overhead volume • Production should be increased. change in type of services used Overhead volume • (A) – production less than budgeted Recommendation: Material price • Material standard should be kept. better quality of equipment or materials Overhead expenditure • (A) – increase in cost of services used. theft. Overhead expenditure • Efficient in cost of services used. Labour rate • Manager should be efficient in controlling labour. excessive use of services. stricter quality should control to make it favourable. Material usage • Defective material.
000 Standard total cost of actual production= (90 units*£ 100 per unit total cost) =£ 9.(Reconciling budgeted and actual results) Total cost= (100 units*£ 100 per unit total cost) =£ 10. or investment funds.000 Variances Direct material price Direct material usage Direct labour rate Direct labour efficiency Variable overhead expenditure Variable overhead efficiency Fixed overhead expenditure Fixed overhead efficiency Total Variances So. Managers are held accountable for both revenues. Actual total cost= £ (9000-300) =£ 8700 [p13] n. small teams. revenues. and costs (expenses). responsibility centers have four classifications: Cost Centers: Part of a business to which a cost is allocated for the purposes of strategic planning. profits. Cost centers can be large divisions of a business. or even individuals Revenue Centers: A Revenue Center is responsible for selling an agreed amount of products or services. departments. Profit Centers: Profit Centers are parts of a corporation that directly add to its profit. For accounting purposes. Generally the same as divisions in an operating component.000 Cost volume variance= (10 units*£ 100 per unit total cost) =£ 1. Its manager is usually responsible to maximize revenue given the selling price (or quantity) and given the budget for personnel and expenses. and therefore. Usually the different profit centers are separated for accounting purposes so that the £ 700 (100) (800) 400 (200) 100 200 300 22 . Lowest organizational level at which funds control functions are carried out. Report findings to management in accordance with identified responsibilities centres: The Responsibility is the unit in the organization that has control over costs.
com/ebooks/Costing/ 2.globusz. www. The essential element of an investment center is that it is treated as a unit which is measured against its use of capital.buzzle. 2008. Graham Mott. London guildhall College . 1. Incremental Analysis in the Responsibility Center: Incremental analysis is used to find the impact of changes in costs or revenues. Horngren. Text books: 1. Decisions involving incremental analysis include the following: Make or buy (Profit Center) Sell or process further (Revenue Center) Special order (Cost Center) Changes in production and/or technology (Investment Center) [p14] Reference: 1.http://www. as opposed to a cost or profit center.co.accountants. which is measured against raw costs or profits. Class Lecture.management can follow how much profit each center makes and compare their relative efficiency and profit.Cost Accounting 2.com/articles/budgeting/ 23 . 7th Edition. 2010. Accounting for non. Bized.uk 3. source – Cited by Aabir Hussain Jafri . Investment Centers: An investment center is a classification used for business units within an enterprise. given a specific potential scenario.uk http://www.aat. Foster & Datar. Matz Usry-Cost Accounting Planning & Control 3.ac. Kogan Page Limited Available at online: 1. Www.
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